By focusing on how much revenue they hope to raise from tax increases on the well-off, Democrats risk limiting the scope of their ambitions.
Last week, President Biden introduced a $2.2 trillion infrastructure plan in a speech, calling it “a once-in-a-generation investment in America.” And on Wednesday, he and the Treasury Department outlined many of the package’s details, including how to “pay for” it. A close look at those so-called pay-fors, however, shows Democrats are thinking about fiscal responsibility the wrong way. They could be on the verge of sparking some unpleasant short-term overheating of the economy, in which price increases accelerate and the purchasing power of our dollars falls somewhat. If the final legislation were to grow much larger — toward the $10 trillion level many progressives in Congress are pushing — it could send such inflation soaring.
In an interview on MSNBC last week, Representative Alexandria Ocasio-Cortez of New York explained her mixed feelings about the president’s proposal, saying she has “serious concerns that it’s not enough to realize the very inspiring vision that Mr. Biden has advanced.” Rather than spending roughly $2 trillion over eight years, Ms. Ocasio Cortez and many of her Progressive Caucus colleagues would prefer “to go way higher” and on a shorter timeline.
She’s right that it is possible for Congress and the Biden administration to go bigger, faster — but only by shifting to a completely different budgeting framework: Instead of passing legislation that leans on taxing corporations and the rich to keep spending from increasing the deficit, they would have to develop a robust plan with a focus on containing inflationary pressures as that heightened government spending hits the real economy.
The president called his plan “fiscally responsible” during his speech simply because it will raise more revenue than what he’s proposing to spend. On paper, and according to conventional wisdom, this is a balanced policy. It may satisfy the scorekeepers at the Congressional Budget Office or even earn high marks from deficit hawks. But because these proposed hikes fall exclusively on corporations and more affluent Americans — who have a relatively high marginal propensity to save rather than spend — the taxes may not diminish enough private sector spending to prevent the government’s own increased outlays from igniting some inflationary overheating, especially if Congress does “go way higher.”